More Questions (and Answers) About Non-Spouse IRA Inheritance

Dec 14, 2017

inheritanceOur most recent monthly webinar was entitled 11 Things Every Advisor Should Know When a Non-Spouse Inherits an IRA. Our own Dean Mioli (the self-proclaimed Tax Doctor) is continuing the conversation here by addressing a few unanswered questions.    

As a follow up to our webinar about non-spouses inheriting an IRA, we want to address a few of the questions that we did not get to during the event.

Q: Can the RMD of an inherited IRA be given to a charity like a regular IRA?

A:  The answer is yes, provided the inherited IRA beneficiary is over age 70 ½ on the date of the distribution. The distribution is called a qualified charitable distribution (QCD) and has a maximum limit of $100,000 per year, per taxpayer. When a QCD is properly executed, the RMD will not be reported as taxable income, though the taxpayer will forgo a charitable deduction.

Q: Is there any disadvantage to moving the inherited IRA to her own IRA?

A: Assuming we are talking about a non-spouse:

This is critically important; a non-spouse can NEVER move inherited IRA funds into an IRA in their own name. This is considered a total distribution and income tax will be due.

Also, non-spouse beneficiaries cannot convert an inherited IRA to an inherited Roth IRA, nor convert an inherited IRA to their own Roth IRA.

Q: When does the first RMD need to be taken by a designated beneficiary after they inherit the IRA?

A: Generally, you must begin taking RMDs for inherited IRA assets by December 31 of the year after the year of the original owner’s death.

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Q: Can an IRA owner designate a non-family member as a beneficiary?

A: Absolutely. There is no requirement that an IRA owner name a relative, nor for that matter a spouse.

Q: Does SEI automatically calculate the RMD for inherited IRAs?

A: Yes on SEI’s Wealth Platform RMDs for inherited IRAs are automatically calculated.

Q: Is it true that if you take out more than the RMD in an inherited IRA, there is no 10% penalty?

A: Correct. The 10% early distribution penalty will not apply, since a distribution due to death is an exception to the penalty regardless of the size of the distribution.

I hope the above addresses some of your questions on inherited IRAs by a non-spouse. IRA rules are complex and its certainly best practice to make sure everyone knows the rules before a plan of action is executed. Some mistakes are not reversible!

Information provided by SEI Investments Management Corporation (SIMC), a wholly owned subsidiary of SEI Investments Company (SEI).    Neither SEI nor its subsidiaries is affiliated with your financial advisor. 

Neither SEI nor its affiliates or subsidiaries provides tax advice. Please note that (i) any discussion of U.S. tax matters contained in this communication cannot be used by you for the purpose of avoiding tax penalties; (ii) this communication was written to support the promotion or marketing of the matters addressed herein; and (iii) you should seek advice based on your particular circumstances from an independent tax advisor.

 Discussion based on tax laws and regulations in effect as of December 14, 2017

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